Why Supply of Biotech Space Remains Tight

BY LISA ASHLEY
ARC Architects

A quick survey of the Seattle real estate market reveals there is a significant shortage of space adequate to house the area's growing number of biotechnology and biomedical firms. The increase in start-up biotechnology and biomedical firms is creating strong demand for laboratory space as firms try to get established here before spending hard-won operating capital on their own buildings.

The logical conclusion would be that a shortage of space plus healthy demand equals a thriving real estate market. Yes, but not in this case.

The supply side of this equation is constrained by the lack of adequate space and the costs involved in bringing laboratory spaces up to the standards that scientists need in order to support their research and development projects. These include special mechanical systems, piping, "clean rooms," and animal research facilities.

Leasing activity is reported to be both "active" and "slow" depending on who you talk to. Bob Mooney of Teutsch Partners, who represented Corixa Corp. in its recent move into the Fred Hutchinson Cancer Research Center on First Hill, and Tom Ranken, executive director of the Washington Biotechnology and Biomedical Association (WBBA), both note that while there is excess capacity in existing facilities like Immunex Corp., there is a shortage of space that can be built or modified to suit the special needs of small and medium-sized biotechnology firms.

Ranken said there "just isn't any lab space available right now." He is aware of at least two firms who are actively seeking space and not finding it. "This is probably just the tip of the iceberg because the industry is experiencing growth right now, " Ranken said.

As proof of this growth, the WBBA has doubled the size of its budget and staff this year and has 140 corporate members. More important, the down period of 1992 and 1993, when investors were scared off by the uncertainties of health care reform and a number of clinical disappointments occurred, is reversing. Ranken said stocks are doing well and firms are able to raise capital again.

Michael Tinker, facilities manager for Heart Technology and Al Hodge of Coldwell Banker confirmed the high-occupancy, low-availability situation for the Eastside, noting that there are very few spaces that are not substandard. They are either too small or need work to accommodate development, testing and production of special products like Heart's Rotoblator, a rotational angioplasty system for removing plaque from arteries in and near the heart.

Complicating the matter is the fact that once a building has been adapted for a biotech or biomed user, it is hard to re-lease to any other type of tenant. The cost of removing or re-doing building systems is prohibitive to tenants like software firms who need flexible office space but without the pumped up systems.

Mike Girellini of Ewing & Clark said he knows of a property that could support a 20,000 to 40,000-square foot building and is located in an area of the city that would probably attract a biotechnology tenant. However, once the owner buys the land, covers his construction costs and opens the building, he must charge an exorbitant rent in the range of $26 to $28 a square foot to earn a profit.

Downtown office space now averages $22 a square foot, while Class B and C office space drops into the $14 to $18 range. The landlord ends up with a very specialized user who may or may not survive the typical six-year effort it takes to develop and bring to market a new product in this industry.

Ranken agrees that developing space for biotechnology firms is not easy because it is an uncertain new area with no guarantee that a firm will succeed with its product. But he thinks developers or owners eventually will do well building for biotechnology tenants given the economic forecasts for this industry.

"For every company that could cost a (property) owner money, there are three or four others who will succeed and will be excellent tenants," Ranken said.

Another trend affecting how much space is either leased or built is a shift in goals for some biotechnology firms. Rather than ultimately becoming what is known as a "fipco" or fully integrated pharmaceutical company (like Immunex in Seattle) more firms are choosing to become an "incubator" of new drugs or products, providing a pipeline to the larger pharmaceuticals. Larger "fipcos" then take their product and handle final approvals, manufacturing, marketing and sales.

One facility manager noted that she expected to see more partnering between the small incubator firms and the large "fipcos," primarily for economic reasons. The small firms may have R & D space, maybe an animal lab and perhaps a pilot plant, but will leave the regulatory work, large-scale production, sales and marketing to the big firms who have those departments in place already. For example, a firm such as Corixa could rent, lease or otherwise use the production and marketing capabilities in an Immunex-type facility.

Ranken said he expects to see a model somewhere between the fipco and a "virtual company" where research and production are farmed out. This model would include medium-sized firms who become very good at what they do, and focus on one aspect of the process such as discovery or clinical trials.

He expects to see "significant small companies" continuing to develop here as long as the "big engines" keep going. Those engines, the University of Washington, the number two recipient of federal research funds, and the Fred Hutchinson Cancer Research Institute, the number one recipient of National Cancer Institute funds, have continued in business for years and show no signs of slowing down.

The proposed conversion of the older Fred Hutchinson Cancer Research facility to a biotechnology "think tank" where two or three firms share animal facilities and the specialized infrastructure that's already in place makes sound economic sense in this scenario.

Ranken said this is a wild card in the local real estate scene because Fred Hutchinson still needs the First Hill space until it can move into its second building two years from now and the demand for space is critical right now. The firm purchasing the First Hill space has not been identified and has not indicated whether it will search out tenants similar to Corixa.

Mooney noted that there is activity in the Seattle real estate market from several companies, while other firms like Darwin Molecular have suddenly placed their bricks and mortar projects on hold while they concentrate on product development. Ranken and Girellini both cited the continued activity in the high tech corridor of SR 405 as evidence that firms are active.

On the Eastside, Tinker confirmed that Heart's recent merger with Boston Scientific Inc. has meant additional activity and possible expansion at the campus in Redmond.

Boston Scientific has acquired three companies since it bought Heart in 1995, including Simed, a sister company to Heart that develops and manufactures patient monitoring systems using state-of-the-art medical sensor technology. Tinker anticipates that Boston will look for additional property since its two buildings are essentially full.

Hodge said that the trend to do turn-key buildings such as SpaceLabs Medical, Inc.'s second building on its campus, has slowed. "Firms just don't seem to have the VC (venture capital) to spend on a new facility," he said.

Bill Neil of Kidder Mathews & Segner, Inc. said firms he is representing are being "penny safe instead of pound foolish," as they carefully assess what they will really require in terms of space. Neil noted that Darwin's recent change of heart regarding a downtown property was based on the realization that making such a commitment might have been premature and that they are reassessing their needs. Neil is still seeing plenty of activity, however.

He noted that many biotechnology and biomedical firms have long believed that they need to be located in downtown Seattle, to be accessible to the University, Fred Hutchinson and hospitals for collaborative relationships. But he said some of the start-up firms are bringing scientists here from all over the world. There may be a trend among these scientists to locate in suburban neighborhoods, near schools, rather than in dense urban settings because they are bringing families with them.

As a new idea is being developed a spin-off firm may form as the developers of those ideas strike out on their own. The leaders of those firms tend to be scientists who are continually surprised at the lack of Class A, B or even C space and the total lack of laboratory space available in the market today, Neil said.

These new firm founders have had the support of the National Institute of Health (NIH) and other undergraduate and graduate institutional settings, and are used to the institutional-quality spaces and labs they were nurtured in. Many are having a tough time making the transition from the public to the private sector.

The main trend Neil is seeing is the "pay as you go" approach to upgrade existing spaces rather than spending the firm's seed money out of pocket to develop a new complex. It is obviously a good economic decision for a young firm in its early stages, Neil added.

The trend to establish a virtual company, leasing small offices in a downtown Seattle high-rise and contracting out for labor and services, has not yet materialized, with one or two exceptions.

At least one Seattle broker familiar with the current biotechnology and biomedical firms in the area said he would not be surprised to see it happen some day.

Like the industry itself, the real estate needs of these unique, fast-paced firms seem to change almost over night. Fueled by the engines of the University of Washington and the Fred Hutchinson Cancer Research Insitute, the real estate industry can expect to see healthy activity in biomed and biotech for the next five to 10 years.

Lisa Ashley is marketing director for ARC Architects, a firm that provides facility planning and architecture for biotechnology and biomedical companies.

Return to Commercial Marketplace top page